Dear Clients and Fellow Shareholders,
In many industries, disruption favors the upstarts; the smaller, newer competitors that overturn the existing order.
The asset management business is different. Not because our industry is immune from disruption; nothing could be further from the truth.
But future success in the asset management industry will require a certain size, breadth of core capabilities and global reach that are foundational to providing investors with comprehensive solutions.
Most every force reshaping our industry in 2018—more empowered clients, growing regulatory burdens, the globalization of investing and the preeminence of technology—requires asset managers to have the scale, skillset, capacity for innovation and track record possessed by precious few companies.
Legg Mason has it.
After I was named CEO five years ago, I said we would strive to be the best asset management company in the world ... for our clients, our shareholders and our employees ... and in that order.
The path to this goal is not easy. But it is clear.
Legg Mason’s future leadership will be built on the seamless investment experience that clients expect, with the investment independence this moment requires.
Several developments—in the markets, in our industry and within Legg Mason—provide our company with a unique opportunity to deliver significant growth for years to come.
Here is the roadmap.
Look at the environment for asset managers in 2018 and here is what you see:
- A rapidly evolving global regulatory landscape that is changing expectations for, and the requirements around, how we engage with clients.
- Technology, artificial intelligence and machine learning reshaping every aspect of our business, from how we invest and operate to how we distribute our products.
- Relentless competition, with downward pricing and margin pressure that shows few signs of abating.
This sea change in our industry—which is driving consolidation and rewarding a few large players with the scale to compete—is now being accompanied by a sea change in markets.
In 2017, global stock markets, for the first time ever, rose every month of the year. And it was a fairly smooth ride.
But 2018 has brought more volatility than any time since the 2008 financial crisis, a bracing reminder that “easy and up” is not the permanent condition of the equity, or any, markets.
A nine-year bull market in stocks has boosted portfolios and consumer confidence but it cannot obscure the epochal challenge facing investors and institutions:
The gap between what investors need and the returns that the markets and benchmark strategies are likely to deliver in the years ahead … is growing.
Although the United States is in one of the longest periods of sustained economic growth since World War II, it is also one of the weakest. In developed markets around the world, the twin drivers of growth—an expanding workforce and productivity gains—are slowing as populations age.
It all adds up to lower projected returns on financial assets and lower interest rates, especially with valuations arguably stretched across many asset classes.
This represents an extraordinary challenge for institutions like pension funds—which typically need 7 to 8 percent annual returns to keep promises made to current and future workers—and for individuals shouldering more responsibility for their own economic and retirement security.
In America alone, 10,000 people will retire today, tomorrow and for decades to come. They’ll need their portfolios to grow, but without too much risk. They’ll need income, but the traditional ways of generating it may no longer be sufficient in a low-inflation, low-interest-rate world. There are no simple answers to these vexing challenges.
Many investors and institutions know this is coming, even if they have not yet adjusted their portfolios or their approach accordingly. It’s hard to blame them when asset classes were rising across the board for most of the last decade and one could notch double-digit annual returns by investing in a few passively managed index funds.
But we are now entering a more volatile and uncertain era. Growth and income will not come easily, creating challenges but also immense opportunity for active asset managers who can truly deliver alpha for investors.
Investors are empowered with more choice than ever before and won’t tolerate or pay for groupthink or off-the-shelf solutions. They want and deserve a custom plan that is accessible and affordable, from an advisor or asset manager that can invest in any geography and in multiple traditional and alternative asset classes and, above all, from a manager who delivers the returns they need with risk they can accept.
Legg Mason is built for this moment.
Getting to … and staying at … the table
Recently, Legg Mason won a significant new mandate from an institution. Afterward, the institution’s leader told me that Legg Mason’s investment strategy and performance was, of course, a key driver in their reallocation decision … and indeed nearly 80 percent of Legg Mason’s assets under management (AUM) have beaten their benchmark in the last five years.
But he also commented that our investment performance alone was not sufficient in their decision-making. What tipped the balance in Legg Mason’s favor was everything else that we provide: the service, the client experience and the distribution support that we offer in the field.
This example is but a microcosm of what both retail and institutional investors expect from their asset manager in 2018, where beating your market benchmark only gets you to the table. Staying at the table after you’ve arrived requires best-in-class service, not just when measured against other asset managers but even as measured against other consumer experiences.
Legg Mason provides just such service because we recognize that achieving our corporate mission of Investing to Improve LivesTM requires us to relentlessly expand choices for our clients. Today, we offer more asset classes. More investment vehicles. And more ways to work with Legg Mason than ever before, whether you are a retail or institutional client, based in the U.S. or internationally.
Executing on our strategy of expanding client choice has benefited Legg Mason clients, as well as our shareholders, who are invested in a company that is significantly and intentionally diversified and, therefore, more resilient to shifts in any one market or line of business.
- In 2014, Legg Mason acquired QS Investors to provide expertise in custom client solutions and Martin Currie to offer differentiated exposure to international and emerging markets.
- 2015 saw the addition of RARE Infrastructure, an investor in major liquid infrastructure assets in developed and developing economies.
- 2016 brought the added capabilities of Clarion Partners, which invests in and manages over 1,000 private equity real estate assets throughout the Americas, and EnTrust, a provider of numerous alternative strategies including direct lending and co-investments.
Today, the Legg Mason family includes nine investment affiliates with specialized expertise across asset classes and geographies, each with total investment autonomy, and each empowered to share their perspectives independent of the other affiliates or Legg Mason.
Other asset managers may appear to have a similar approach to Legg Mason, but few are as committed to investment independence as we are. For example, Brandywine Global and Western Asset are both Legg Mason affiliates and world-class fixed-income managers. But they may give you very different or diverging perspectives on this asset class … and that is by design.
As Legg Mason has added more asset classes, we have also expanded client access to these investment strategies both through vehicles and distribution.
Today, Legg Mason offers twelve different product vehicles ranging from mutual funds, variable insurance trusts and separately managed accounts to active exchange-traded funds and collective investment trusts. Further, a 2016 Legg Mason investment—Precidian Investments—should enable us to create additional diverse vehicle choices.
Of our 3,300 employees globally, over 500 are focused on distribution and on providing our clients with the investment solutions they need and the distinguished service they prefer.
But scale and choice alone are not enough—our affiliates also collaborate to solve investment challenges and develop innovative solutions for fast-evolving client needs.
One notable example involved QS Investors and Western Asset Management. Together they created a $200 million custom managed volatility mandate that combined Western’s liability-driven investment (LDI) capability with QS’s high dividend equity expertise to create a solution that could enable a client to generate more returns without taking on significantly more risk. We expect similar success in working with clients whose needs are increasingly complex and challenging.
We expect the future investment environment to be more difficult. But Legg Mason now has the capabilities in place to help investors navigate those challenges. We can find growth opportunities and mitigate risk where others can’t or won’t. Investors have access to our affiliates as single strategy options, or they can look to Legg Mason to construct a completely tailored solution, matching different affiliate products and vehicles to specific client-directed outcomes.
After several years of acquisition and consolidation, Legg Mason is now poised for a period of significant organic growth.
While the investment independence of our affiliates will remain a key differentiator and competitive advantage for our business, we are pursuing, together, significant opportunities to collaborate more intensely and leverage our scale. We expect this collaboration to result in our being able to deliver greater results for our clients and ultimately be a driver of growth for our company. And to the extent that greater operational effectiveness yields savings, we will look first to reinvest in various parts of the business or otherwise return them to shareholders.
I’ll admit there is something counterintuitive about Legg Mason—a company founded in 1899—thriving in the face of unprecedented disruption.
But that is precisely what we believe we are positioned to do.
As a company, and as a leadership team, we anticipated long ago that real industry disruption was coming, and we had a simple choice: we could change or have change forced upon us.
We chose the former, and our clients and shareholders are much better for it.
As CEO, I am focused on the prospect of Legg Mason delivering significant growth—as a validation and outcome of delivering for our clients and at a level that reflects, commensurately, our tremendous capabilities, our commitment to innovation and the investment performance of our affiliates.
In recent years, as we have repositioned the company, Legg Mason has led the industry with our exceptional rate of return of our investors’ capital, returning $3.7 billion to shareholders since March 2010 and increasing our dividend by a factor of eight over the same time period.
But it is time to grow and we have the strategy in place and resources to do it.
As I look out another five years, I know parts of our industry and our business will be radically different. We are positioning Legg Mason to thrive in the face of these changes, particularly as they relate to technology and changing client expectations.
But I also know that certain aspects of this company won’t change: Legg Mason will remain committed to Investing to Improve LivesTM. When we perform and help someone retire or send their child to college, when our investments fund the construction of a new school or road, or when we back the creation of a new business, it is a catalyst for a virtuous cycle that benefits the communities in which we operate.
And I know our day-to-day work will continue to be guided by our “No Chalk” culture, in which all Legg Mason employees understand that we are always to conduct our business well “in-bounds” of the chalk lines of ethical territory.
In an era where the public increasingly mistrusts the actions and motives of public and private institutions, we expect that Legg Mason’s focus on integrity and our long track record as a responsible steward of client assets will distinguish us.
Over the years, we have earned the trust of our clients, our shareholders and stakeholders. We never take that for granted. On behalf of all my colleagues at Legg Mason, I thank you for your continued support and I look forward to reporting to you again on another strong year ahead.